We are all aware of the vote cast by the GOP in the House last week. What we may not have been aware of was that partisan block of no votes may have been duped. Voting no on the recent stimulus package is, as we are finding out, the dissident voice of what if. They are not immune to questioning the possibilities of what might happen if they step off the porch and into the fog. What if is a very good question. But what if President Obama had a similar litmus test to determine the resolve or weakness of those “ what if” uncertainties?
Lawrence Lindsey, former economic assistant to the outgoing administration pointed towards that “if” as the key word surrounding the Republican vote of no in an opinion published in the Wall Street Journal. The report that Mr. Lindsey cites is “The Job Impact of the American Recovery and Reinvestment Plan”. Authored by incoming administrative economists Christina Romer (chairman of the Council of Economic Advisers) and Jared Bernstein (Vice President Joe Biden's chief economic adviser), the report took to task the economy and the effects of certain measures. The report also asked the question what if.
As the President’s stimulus package heads to the Senate this week and is expected to undergo some extensive reworking, but not as much as you might think, those what ifs will be debated.
The Democrats began their journey to rebuild the economy on January 9th, a full eleven days before the inauguration of Barack Obama. In that report, they outlined a change in direction for the economy that they believe will offer more bang for the spending buck than the mere slicing of taxes. Taxes, as we all know and loathe, provide revenue for the government, both locally and federally. But the effect of those taxes do not always have a unified effect, so often desired and championed by the GOP. Even as the government cuts them to apply stimulus, the states raise them, in essence negating the overall good of the move.
So how do you stop the bleeding on the state level? First, by pointing out that, “Tax cuts, especially temporary ones, and fiscal relief to the states are likely to create fewer jobs than direct increases in government purchases.” As Mark Zandi of MoodyEconomy.com illustrates, the tax cuts so often sought for by the GOP actually do far less than what had been hoped.
Lump sum rebates actually put a mere two cents of stimulation back into the economy, with across the board cuts offering only three cents over each dollar of benefit. A cut in corporate tax rates does do better but by only thirty cents on the dollar. You can actually gain nothing by accelerating depreciation.
While the GOP points to the need for businesses to operate in a low tax environment, and this has been well documented, does not directly create jobs. The shareholders are pleased that the company they have invested in can operate with less tax burdens on the profits but then, these same shareholders rejoice at any cost cutting measure including mass layoffs. Looking for Wall Street’s approval is not what the economy needs.
President Obama’s focus on spending for such things as infrastructure (adds 59 cents for every dollar invested), an increase in food stamps (79 cents), the extension of unemployment benefits (64 cents) and aid to state governments (36 cents) points to sound policy. The reason these jumpstart funding efforts work according to Mr. Zandi is hardship. These incentives are spent in the near-term and not saved and in many cases, shores up housing confidence.
He writes “Nothing is more psychologically debilitating, even to those still employed, than watching unemployed friends and relatives lose benefits.” When Mr. Lindsey points to this report as a way to find a benchmark for the success of the stimulus, he avoids this caveat: “It should be understood that all of the estimates presented in this memo are subject to significant margins of error.”
And the report makes no bones about what might happen if the plan takes hold. The authors of the report clearly state some unknowns facing the stimulus. “We believe that the rule of thumb that 60% of funds devoted to state relief will be used to prevent spending cuts and that 30% will be used to prevent tax increases, and that these effects will occur with a lag of about three months, are good first approximations.”
Mr. Lindsey continued: “If, for example, the unemployment rate appears to be peaking at around 8% and shows some modest signs of declining by year's end, then the administration should take comfort that it took the right approach.” And if that happens, the I-told-you-so group will have succeeded where no Republican has since the Reagan years. “But if the unemployment rate is over 8%,” he continues. “and more important, still appears to be climbing, then it might be advisable for the administration to propose tax cuts and less spending in its budget next year.”
The bill has flaws but its heart is in the right place. And perhaps that is exactly what Mr. Obama intended. Propose a bill that would work, offer the Republicans the chance to be bipartisan and when they are not, play your “if” card. The ‘if we change this, will you be happy’ may just be the strategy this president will find most successful to employ. A play to their tarnished dignity and a chance to have voice.
I mentioned earlier that Mr. Obama is refusing to act with the approval of Wall Street and his recent public admonishments about bonus packages. But that doesn’t mean he doesn’t also play to their tarnished dignity as well. They have been bailed out, spent the taxpayer money foolishly and very publicly, ignoring the mess of their own making, but what they know is the biggest “if”. This incorrigible bunch of money managers may be the key.
These narrow-sighted professionals can smell money. And a bad bank, the most needed part of the stimulus package, needs Wall Street expertise to price these toxic loans, find the right buyers and get that done in fifteen years or less. I won’t bore you with the details of Sweden’s success (all the assets in their bad bank were sold three years after their effort at sifting through toxic loans began), but the possibilities are there. Very profitable possibilities.
Max Holmes, writing in the New York Times suggested numerous bad banks, each assigned a bank to work with would spread the risk and create a quicker road to solvency while avoiding the appearance of nationalism. The idea will eventually go global. It has to.
In the meantime, the stimulus bill will change, become larger then smaller then end up close in size to where it is now. Unlike the “decider” before him, Mr. Obama may be allowing Congress to decide on their own that his ideas will work, “if” he is only given the chance to allow them to take hold. If the Republicans see the end result, if Wall Street sees the potential, if the states get the recovery when they need it, if the banks can properly price assets they don’t want, things will shift.
President Obama seems to be man who listens to the dissident what if. Truth be told, these are uncharted waters, as was clearly pointed out at Davos. No one knows what to expect next. Mr. Obama may be a decider in his own right, but it seems as though after a mere two weeks, he wants you and Congress to feel good about the hard decisions that we will have to live with.